Still Short:
For the past 3 days, silver has been in free fall. In fact, in the last 3 days, we've seen the last 30 days of gains disappear. We've blown through the 20 day moving average and are sitting at the 50 day moving average. Some investors are expecting a bounce off the 50 day moving average. I think we are going to cut right through it like a butter knife.
So far, losses are happening at a rate of about 10x what we've seen gains piling up for the past 3 months. A healthy correction, it surely doesn't look like the healthy correction we saw in January or March. This looks like a bubble bursting to me. That's why I am adding to my short position as things deteriorate.
click to enlarge
Lots of Overhead:
Lots of silver has traded hands at higher prices in the last 30 days. What I think we are seeing is the beginning of a positive feeback cycle where lower prices beget more selling, which begets even lower prices. To tie in the chart below of investor emotions to silver, I would say that we are currently experiencing fear. I would argue that the anxiety phase passed 5 days ago when we saw the first sign of weakness - which ended my long silver trade and put me on the sidelines waiting to go short.
For the past week, we've seen the trading volume on a daily basis consistently be more than 1/3 of the available outstanding shares in the ETF SLV. If you want to make money in the stock market, the idea is to sell whatever you own to someone else at a higher price after dividends. Considering SLV doesn't pay dividends, the idea is to simply sell it later at a higher price. With all the silver that has traded in the last week at higher prices, imagine all the resistance coming down from above. To me, it feels like a sumo wrestler was just dropped on the stock price.
Higher Margin Requirements:
The CME and COMEX have increased their margins to trade silver. Why? I think that they are trying to curb the amount of trading in silver.
Billionaire Carlos Slim:
Billionaire Carlos Slim has been selling silver futures for weeks. He's been selling silver futures out 2 years. What's interesting about this is that the last quarter, his company Frisco was actually losing money on its bets in Q1 against silver due to margin calls on his short positions.
Bottom Line:
I can't find anyone who wants to buy silver with the current chart and the current price. Everyone I know that is potentially looking to buy is waiting for things to stabilize. Given my perception that people are still skeptically bullish on silver and still see this as a healthy pullback, we need to transition to the point that this is indeed not a healthy pullback to get more people to panic sell.
You have a few rich people, some of who own silver mines like Carlos Slim who have been getting out at what in retrospect looks like the top. In the land of investments, it's worth noting that the majority of people lose money. I want to urge caution to anyone entering the silver trade as a long at this point of time. You are effectively standing in front of a Jumbo 747 airplane that is going at 50 miles an hour and trying to get it to stop with your hands. Odds are that you get run over. Whoever bought that million dollars worth of puts at $25 sure looks like a genius.
Disclosure: I am long ZSL.
Additional disclosure: I bought calls on ZSL at a strike of 25 that expire January 2012.
